The ringgit will strengthen 5 percent against the dollar by
year-end and a 7.3 percent gain is likely for the peso, based on
estimates given by Philip Moffitt, head of Asia-Pacific fixed
income at Goldman Sachs Asset, which oversees $860 billion.
Benchmark rates in Malaysia and the Philippines will increase at
least 25 basis points by the end of 2014, according to the
majority of economists in Bloomberg surveys.

“We expect interest rates to rise over the next year in
Malaysia and the Philippines, and that’s less likely in some
other Southeast Asian economies such as Thailand,” Sydney-based
Moffitt said in an Oct. 8 phone interview. “We’ll see a bounce
in the two currencies.”

The ringgit has led a rebound in Southeast Asian currencies
since Aug. 31 as the Federal Reserve unexpectedly held off from
reducing stimulus that fueled demand for emerging-market assets.
The region’s currencies all sank in the prior four months, led
by an 11 percent slide in Indonesia’s rupiah, as the U.S.
central bank signaled plans to rein in its $85 billion-a-month
bond-buying program.

Tapering of the program is unlikely to start before
December, and Southeast Asian assets are being boosted by
Japanese demand for overseas investments, said Moffitt, who
oversees Goldman Sachs Asset’s unconstrained & emerging-market
local-debt funds. “Liquidity generation” in the U.S., euro
region and Japan is the highest in two years, he added.

Ringgit Outperforms

The ringgit climbed 2.1 percent this month to 3.1925 per
dollar, the best performance among Asia’s 11 most-traded
currencies, according to data compiled by Bloomberg. Barclays
Plc raised its three-month forecast for the ringgit by 4.5
percent to 3.15 in September on expectations global funds will
boost holdings of the nation’s bonds, Hamish Pepper, its
currency strategist in Singapore, said in a Sept. 27 interview.

Bank Negara Malaysia held interest rates at 3 percent at a
Sept. 5 policy meeting and warned of increased uncertainties
surrounding the domestic growth and inflation outlook. Increases
in consumer prices are likely to quicken as the government cuts
subsidies, it said in a statement after the meeting. The last
move in borrowing costs was a 25-basis-point rise in May 2011.

Subsidy Cuts

Prime Minister Najib Razak reduced subsidies on gasoline
and diesel on Sept. 3 to rein in the government’s budget
shortfall. Policy makers may announce increases in flour and
sugar prices this month, according to an Oct. 6 report in the
New Straits Times.

Bank of Tokyo-Mitsubishi UFJ Ltd. sees a chance of a 25-basis-point increase in Malaysian interest rates in the fourth
quarter of 2014 “if the pare-back in subsidies is substantial
enough to impinge on the consumer price index,” Leong Sook Mei,
the bank’s Southeast Asian head of global markets research in
Singapore, said in an interview yesterday. Consumer-price gains
eased to 1.9 percent in August from a 16 month-high of 2 percent
in July, data showed last month.

The ringgit has room to strengthen due to improving growth
expectations in China in the near term and because of Bank
Negara’s shift to “a slight hawkish bias,” Citigroup Inc.
strategists including Siddharth Mathur in Singapore wrote in an
Oct. 3 report. China’s economy, which is second only to the U.S.
in size, has strong momentum, and imports will reach $10
trillion in the next five years, the official Xinhua News Agency
reported this week.

Philippine Growth

The peso has gained 0.9 percent this month to 43.155 per
dollar and Moffitt predicts a year-end exchange rate of 40.

The currency has climbed as President Benigno Aquino
increases spending to a record in 2013 while seeking more than
$17 billion of investments in highways and airports to improve
infrastructure. Gross domestic product increased 7.5 percent in
the second quarter from a year earlier, matching China’s pace.
The nation is poised to be among the world’s five fastest-growing economies in 2013 and 2014, Bloomberg surveys show.

Bangko Sentral ng Pilipinas will probably keep interest
rates steady this year and next, “barring any unforeseen
shocks,” Governor Amando Tetangco said in an Oct. 2 interview.
The central bank held its benchmark rate at a record-low 3.5
percent for a seventh meeting on Sept. 12.

Inflation Goal

Inflation eased to a four-year low in August, with consumer
prices rising 2.1 percent from a year earlier. The central bank
aims to have consumer-price gains averaging 3 percent to 5
percent in 2013 and 2014.

The Philippine economy is in a better shape than most of
its Asian counterparts, which should provide support for the
peso, Mitul Kotecha, Hong Kong-based head of foreign exchange
strategy at Credit Agricole SA, said in an Oct. 7 interview.

Philippine GDP is forecast to increase 7 percent this year,
the most since 2010, according to the median estimate of
economists in a Bloomberg survey. That compares with projected
growth rates of 4 percent for Thailand, 4.5 percent for Malaysia
and 5.8 percent for Indonesia, separate Bloomberg surveys show.